Opinion
Case No. 10-16069 Adversary No. 10-1205
08-08-2012
In re: Richard Risch Deborah Risch Debtors. The Ebenezer Road Corporation d/b/a Western Hills Retirement Village, Plaintiff, v. Richard Risch, et al., Defendants.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
______________
Burton Perlman
United States Bankruptcy Judge
Judge Burton Perlman
Chapter 7
ORDER DENYING DEFENDANTS' MOTION FOR AN AWARD OF ATTORNEY FEES
AND COSTS UNDER § 523(d)
This matter is before the Court on the motion of Defendants, Richard and Deborah Risch, for an Award of Attorney Fees and Costs Under § 523(d) (doc. 34). Plaintiff, the Ebenezer Road Corporation, filed an objection to the motion (doc. 37), to which Defendants replied (doc. 38). Defendants filed this motion following the Court's decision (doc. 32) in the above-captioned adversary proceeding, which granted Defendants' Motion for Summary Judgment on all counts of Plaintiff's complaint. I. Jurisdiction.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). II. Applicable law.
Section 523(d) of the Bankruptcy Code provides as follows:
If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.Thus, a debtor must establish that "(1) the creditor requested a determination of the dischargeability of the debt [under § 523(a)(2)], (2) the debt is a consumer debt, and (3) the debt was discharged" in order to prevail under § 523(d). In re Strausbaugh, 376 B.R. 631, 636 (Bankr. S.D. Ohio 2007) (internal quotation omitted). The term "consumer debt" is defined in the Bankruptcy Code as "debt incurred by an individual primarily for a personal, family, or household purpose." § 101(8).
The debtor carries the burden on these first three elements. "The burden then shifts to the creditor to prove substantial justification or special circumstances by a preponderance of the evidence." In re Thomas, 258 B.R. 167, 168 (Bankr. N.D. Ohio 2001) (citing American Savings Bank v. Harvey (In re Harvey), 172 B.R. 314, 318 (B.A.P. 9th Cir. 1994) and In re Goss, 149 B.R. 460 (Bankr. E.D. Mich. 1992)).
A creditor is not presumed to have been "not substantially justified simply because it did not prevail [on its § 523(a)(2) claim]." In re Stine, 254 B.R. 244, 250 (B.A.P. 9th Cir. 2000) (internal citation omitted). See also In re Ritter, 404 B.R. 811, 832 (Bankr. E.D. Pa. 2009). To determine, therefore, whether a creditor's position was "substantially justified" for purposes of § 523(d), several courts have considered whether a creditor has "(1) a reasonable basis in law for the theory it propounds; (2) a reasonable basis in truth for the facts alleged; and (3) a reasonable connection between the facts alleged and the legal theory advanced." In re Baker, 206 B.R. 507, 509 (Bankr. N.D. Ill. 1997). See also In re Ritter, 404 BR. at 832 (citing In re Walker, 299 B.R. 141, 145 (S.D. W. Va. 2003). Other courts have looked to the totality of the circumstances. See In re Thomas, 258 B.R. at 169 (citing Bank of America v. Miller (In re Miller), 250 B.R. 294, 296 (Bankr. E.D. Ky. 2000) (quoting In re Williams, 224 B.R. 523, 531 (B.A.P. 2d Cir. 1998)); Matter of Phillips, 153 B.R. 758, 763 (Bankr. E.D. Mich. 1993)). III. Positions of the parties.
Defendants contend that the first three elements are easily satisfied, arguing that Plaintiff initiated this adversary proceeding, the alleged debt at issue is a consumer debt, and such debt was deemed dischargeable pursuant to this Court's prior decision. They argue that Plaintiff did not clearly show that a debt was owed to it by Defendants, and that in any case, such alleged debt was a claim for breach of contract and not for fraud under § 523(a)(2). Defendants further state that the deterrent value of § 523(d) is properly present in this case, and that the provision should be construed broadly in favor of debtors.
Plaintiff first argues that the alleged debt at issue is not a "consumer debt" as that term is defined under § 101(8). Plaintiff then contends that the alleged debt in this case "arose from the business relationship between Debtor and Plaintiff," and was not a typical consumer debt transaction, which involves the extension of credit to a consumer. Plaintiff next asserts that its claim was substantially justified, as demonstrated by its litigation in the state court and participation in the bankruptcy case, and urges that its filing is not the type that Congress wished to deter with the addition of § 523(d). Plaintiff also argues that Defendants' admissions as to how certain funds of Marian Risch were used present special circumstances that would make the imposition of costs and fees upon Plaintiff unjust. IV. Discussion.
In the case before the Court the record shows that Defendants' burden on this motion is satisfied. It is undisputed that Plaintiff initiated this adversary proceeding, the first count of its complaint being brought under § 523(a)(2), and that such count was resolved in favor of Defendants. The third element required of Defendants, that the debt was consumer debt, is also satisfied.
The alleged debt owed to Plaintiff was incurred for the purpose of providing care to Defendant Richard Risch's mother, Marian Risch. Debts incurred for health care have been considered consumer debts. See In re Johnson, 115 B.R. 159, 162 (Bankr. S.D. Ill. 1990) (discussing the term in the context of § 707(b), which is useful in the analysis of the term as used elsewhere in the Bankruptcy Code. See Cypher Chiropractic Ctr. v. Runski (In re Runski), 102 F.3d 744, 746-47 (4th Cir. 1996)); In re Faulkner, 165 B.R. 644, 946 (Bankr. W.D. Mo. 1994). Although Plaintiff has cited a case for the proposition that parents would not constitute "family" for purposes of the defined term, "consumer debt," the Court is not persuaded. In Bennett v. Lukens, 131 B.R. 427, 429 (S.D. Ind. 1991), a debt incurred in order to assist a debtor's sister constituted a consumer debt. The Court holds that the alleged debt owed to Plaintiff is a consumer debt. Defendants having met their burden on this motion, the burden shifts to Plaintiff to establish substantial justification.
In this case, Plaintiff attended the § 341 meeting and "spent considerable time in researching the facts of the Adversary Proceeding" (doc. 37, p. 9). Plaintiff also exerted substantial effort in the Hamilton County Court of Common Pleas prior to the bankruptcy filing. There it obtained a disclosure order, subpoenaed various records regarding Defendants, deposed Richard Risch, and reviewed Defendants' financial records. This Court takes these efforts into account in assessing whether Plaintiff was substantially justified under § 523(d). See In re Thomas, supra, 258 B.R. at 169 ("Among the relevant factors courts consider are whether the creditor attended the 341 meeting . . . as well as the extent of its pre-trial investigation" (internal quotation omitted).).
The opinion in In re Thomas offers a useful summary of Congress' intent in adding § 523(d) to the Bankruptcy Code:
The legislative history of § 523(d) reveals the situation that Congress intended to avoid by authorizing courts to award costs and attorney's fees in § 523(a)(2) proceedings:Id. at 169. The court in In re Thomas goes on to assess the situation before it as follows:
The threat of litigation over this exception to discharge and its attendant costs are often enough to induce the debtor to settle for a reduced sum, in order to avoid the costs of litigation. Thus, creditors with marginal cases are usually able to have at least part of their claim excepted from discharge (or reaffirmed), even though the merits of the case are weak.H.R.Rep. No. 595, 95th Cong.2d Sess. 131, U.S.Code Cong. & Admin.News 1978, pp. 5963, 6092. The legislative history also indicates:
The purpose of § 523(d) is to discourage creditors from initiating meritless actions based on § 523(a)(2) in the hope of obtaining a settlement from an honest debtor anxious to save attorney's fees.H.R.Rep. No. 595, 95th Cong.1st Sess. 365 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6321; S.Rep. No. 989, 95th Cong., 2d Sess. 80 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5866.
The instant case presents no similarity to the situations feared by Congress. The Plaintiff was not a sophisticated creditor seeking to manipulate the Debtors' anxieties about litigation costs. Nor was the Plaintiff's position plainly without merit. Rather, he was a small businessman with rational, albeit ultimately unfounded, hopes of excepting the subject debt from discharge.
The Court finds the situation in In re Thomas not unlike the facts before it. Plaintiff, though ultimately unsuccessful, has demonstrated, through its extensive efforts in the state court and this Court, its good faith effort in pursuing a cause of action under § 523(a)(2). Furthermore, it is apparent to the Court that Plaintiff is not the type of creditor "feared by Congress" at whom this deterrent provision is directed. In re Thomas, 258 B.R. at 169.
The Court holds that Plaintiff was substantially justified in bringing its cause of action pursuant to § 523(a)(2). In light of this conclusion, it is unnecessary to address whether special circumstances exist that would otherwise make an award under § 523(d) unjust. V. Conclusion.
On the basis of the foregoing, Defendants' Motion for an Award of Attorney Fees and Costs Under § 523(d) is DENIED.
IT IS SO ORDERED.
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